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Elevator manufacturer Otis (NYSE:OTIS) missed analysts' expectations in Q2 CY2024, with revenue down 3.2% year on year to $3.60 billion. The company's full-year revenue guidance of $14.4 billion at the midpoint also came in 1.4% below analysts' estimates. It made a non-GAAP profit of $1.06 per share, improving from its profit of $0.92 per share in the same quarter last year.
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Otis (OTIS) Q2 CY2024 Highlights:
- Revenue: $3.60 billion vs analyst estimates of $3.73 billion (3.4% miss)
- EPS (non-GAAP): $1.06 vs analyst estimates of $1.03 (2.9% beat)
- The company dropped its revenue guidance for the full year from $14.65 billion to $14.4 billion at the midpoint, a 1.7% decrease
- Gross Margin (GAAP): 30%, up from 29.1% in the same quarter last year
- Free Cash Flow of $284 million, up 103% from the previous quarter
- Organic Revenue fell 1.2% year on year (9.5% in the same quarter last year)
- Market Capitalization: $39.78 billion
General Industrial MachineryAutomation that increases efficiency and connected equipment that collects analyzable data have been trending, creating new demand for general industrial machinery companies. Those who innovate and create digitized solutions can spur sales and speed up replacement cycles, but all general industrial machinery companies are still at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.
Sales GrowthA company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Regrettably, Otis's sales grew at a weak 1.8% compounded annual growth rate over the last five years. This shows it failed to expand in any major way and is a rough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Otis's annualized revenue growth of 1.1% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak. We also note many other General Industrial Machinery businesses have faced declining sales because of cyclical headwinds. While Otis grew slower than we'd like, it did perform better than its peers.
Otis also reports organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don't accurately reflect its fundamentals. Over the last two years, Otis's organic revenue averaged 4% year-on-year growth. Because this number is better than its normal revenue growth, we can see that some mixture of divestitures and foreign exchange rates dampened its headline performance.
This quarter, Otis missed Wall Street's estimates and reported a rather uninspiring 3.2% year-on-year revenue decline, generating $3.60 billion of revenue. We also like to judge companies based on their projected revenue growth, but not enough Wall Street analysts cover the company for it to have reliable consensus estimates.
Operating MarginRead More Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Otis has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 14.6%. This was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it's a show of strength if they're high when gross margins are low.
Analyzing the trend in its profitability, Otis's annual operating margin rose by 2.4 percentage points over the last five years, showing its efficiency has improved.
In Q2, Otis generated an operating profit margin of 15.8%, in line with the same quarter last year. This indicates the company's cost structure has recently been stable.
EPSRead MoreAnalyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions. Otis's EPS grew at a decent 8% compounded annual growth rate over the last five years, higher than its 1.8% annualized revenue growth. This tells us the company became more profitable as it expanded.
Diving into the nuances of Otis's earnings can give us a better understanding of its performance. As we mentioned earlier, Otis's operating margin was flat this quarter but expanded by 2.4 percentage points over the last five years. On top of that, its share count shrank by 6.4%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Otis, its two-year annual EPS growth of 10.3% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.
In Q2, Otis reported EPS at $1.06, up from $0.92 in the same quarter last year. This print beat analysts' estimates by 2.9%. We also like to analyze expected EPS growth based on Wall Street analysts' consensus projections, but there is insufficient data.
Key Takeaways from Otis's Q2 ResultsIt was good to see Otis beat analysts' EPS expectations this quarter. On the other hand, its revenue unfortunately missed and its organic revenue fell short Wall Street's estimates. Overall, this was a bad quarter for Otis. The stock remained flat at $97.50 immediately following the results.
